Valero Crushes Estimates And Shares Are Heading Higher

Refiner stocks were a stand out performer in 2012 and it looks like their run will continue into the early part of 2013. Valero Energy (NYSE:VLO) became just the latest refiner to report earnings that blew away estimates. I profiled the stock for the first time back in March and have owned the shares since shortly after then. Given how easily the company is exceeding estimates, I see no reason to take profits as the shares still look cheap and are poised to head higher.

Valero made $1.82 a share, more than 60 cents a share above consensus estimates.

It refining gross margin was 20% higher than expected.

Revenues were just under $34.7B for the quarter, much higher than the $31.53B consensus.

Valero Energy Corporation is one of the largest refiners in the world. The company operates through three segments: Refining, Ethanol and Retail.

4 reasons VLO still has upside from $43 a share:

It is continuing to expand its capacity to take cheaper American crude rather than higher priced imported oil for its feedstock. This will continue to drive margins higher much like this earnings report.

It has announced plans to spin off its retail gas stations. This will make Valero a pure play refiner stock which should boost its multiple on the margins when the spinoff is completed.

Even after this huge run up of the past year, the stock still sells for under 9x forward earnings. Consensus earnings estimates for FY2013 had already moved up significantly over the prior three months. Look for these estimates to be bumped up substantially in the coming weeks on the back of this stellar quarter.

The stock yields 1.8% and it has a couple of hydrocracker projects that should boost distillate margins from 33% to 39% according to S&P. The stock sells for just 5x operating cash flow as well.

Disclosure: I am long VLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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